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TIR 06-7: Statutory Changes Relating to Unrelated Business Income of Nonprofit Corporations

I. Introduction

This Technical Information Release announces statutory amendments contained in St. 2005, c. 163 affecting the taxation of corporations exempt from taxation under Internal Revenue Code (IRC) section 501. Pursuant to amendments to G.L. c. 63, corporations exempt from taxation under IRC § 501 will be subject to tax on their unrelated business taxable income as defined under IRC § 512. The amendments are effective for tax years beginning on or after January 1, 2006.

II. Federal Law

Section 501 of the Internal Revenue Code generally exempts certain charitable or non-profit organizations from federal taxation on their income. One exception is the tax imposed by section 511 of the Code on unrelated business taxable income as defined in IRC § 512. Generally, unrelated business taxable income does not include certain investment income, such as interest and dividends.

Prior to the recent statutory amendments to G.L. c. 63, corporations exempt from taxation under IRC § 501 were excluded from the definitions of "domestic corporation" and "foreign corporation" in G.L. c. 63, §§ 30.1 and 30.2. As such, exempt corporations were not subject to the Massachusetts corporate excise.

Recent legislation was enacted to subject exempt corporations to taxation on their unrelated business taxable income. St. 2005, c. 163, §§ 19, 20, 21, 28, and 59. Those sections amended G.L. c. 63, § 30 to expand the definitions of "domestic corporation" and "foreign corporation" to include a corporation which is exempt from federal taxation under IRC § 501. Those sections further amended § 30 to define the net income of a corporation exempt from taxation under IRC § 501 as its unrelated business taxable income as defined in IRC § 512.

The new legislation amended chapter 63 to add new section 38T, which provides that exempt corporations are not subject to the non-income measure of the corporate excise or the minimum tax. Newly added § 38T also allows an exempt corporation with unrelated business taxable income taxable in Massachusetts and elsewhere to apportion its income pursuant to G.L. c. 63, § 38. The apportionment factors must be determined by reference only to the unrelated business activity of the exempt corporation. The credits allowed to corporations under G.L. c. 63 are also allowed to exempt corporations. However, the corporate excise on unrelated business taxable income can only be offset by credits generated from unrelated business activity. [1]

While corporations exempt from taxation under IRC § 501 are included in the definitions of domestic corporation and foreign corporation for purposes of chapter 63, they are not domestic or foreign corporations for purposes of G.L. c. 59, which governs the local property tax treatment of corporations.

Exempt corporations that have gross income from an unrelated trade or business and are required to file IRS Form 990-T, Exempt Organization Business Income Tax Return, will be required to file a new Massachusetts form specifically designed for exempt corporations, modeled on Form 990-T. Under Treas. Reg. § 1.6012-2(e), an exempt corporation is required to file Form 990-T if it has gross income from an unrelated trade or business of $1,000 or more. Exempt corporations will be subject to the administrative provisions of G.L. c. 62C.

The Commissioner intends to refer to IRC §§ 512-514 and the applicable Treasury Regulations as guidance in interpreting the new Massachusetts provisions, and will also be promulgating a regulation on this subject.

V. An Additional Exception to the Requirement to Make Four Estimated Payments for Exempt Corporations for 2006

Exempt corporations are subject to the estimated tax provisions of G.L. c. 63B. That chapter provides that every corporation that reasonably expects its tax in any taxable year to exceed $1,000 must make payments of estimated tax. G.L. c. 63B, § 2. Generally, chapter 63B requires a taxpayer to make four estimated tax payments of its required annual tax. Id. The procedure and requirements that apply to the estimated payments of the corporate excise are explained in the Department's regulation, 830 CMR 63B.2.2. That regulation sets forth exceptions to the general requirement that a corporation is to make four estimated payments. See 830 CMR 63B.2.2(4)(c). In addition to those exceptions, pursuant to this TIR, an exempt corporation is required to make only three estimated payments of its required annual tax for its 2006 tax year as follows:

The first installment is due on or before the 15th day of the sixth month of the taxable year and should be equal to 65% of its required annual payment, the second installment is due on or before the 15th day of the ninth month of the taxable year and should be equal to 25% of its required annual payment, and the third installment is due on or before the 15th day of the 12th month of the taxable year and should be equal to the remaining 10% of its required annual payment.

If a taxpayer is required under G.L. c. 63B and under Regulation 830 CMR 63B.2.2 to make estimated tax payments and fails to make any such payment, the Commissioner will impose an addition to tax upon the amount of the underpayment for the period of the underpayment at the rate established under G.L. c. 62C, § 32. No additions to tax for the underpayment of estimated tax will be imposed for the 2006 tax year on exempt corporations if they make estimated payments as indicated above in this TIR. Estimated payments should be made with Form UBIT-ES. The form and instructions will be available on the Department's website at www.dor.state.ma.us.

/s/ Alan LeBovidgeAlan LeBovidgeCommissioner of Revenue

AL:MTF:lbr

April 21, 2006

TIR 06-7

1. The discussion in this TIR is not intended to address the application of any of the separate provisions of chapter 63 pertaining to transferability of credits, such as the Massachusetts low-income housing credit. Depending on the applicable provisions, certain credits may be transferable by an exempt organization, even if the exempt organization cannot use the credit itself because the credit does not arise from unrelated business activity.